Going Deep: The Middle Kingdom’s Offshore Oil Offensive

China has big plans for its deep-sea oil and gas exploration and production (E&P) activities in the South China Sea (SCS). The Middle Kingdom really has no choice. China’s oil fields are maturing and production has already peaked, leading domestic companies to focus on developing largely untapped reserves in China’s Western interior and offshore fields.

“After experiencing an annual growth spurt of 7% in 2010 and reaching 4.3 million bbl/d, oil production flattened in 2011. New offshore production and enhanced oil recovery (EOR) of older fields were the main contributor to growth in 2010,” the US Energy Information Agency (EIA) reports.

About 85 percent of China’s domestic oil capacity is onshore, while 15 percent is from shallow offshore reserves. Domestic offshore E&P has focused on the Bohai Bay region, particularly the Pearl River Basin, offshore Beijing. China has activities in the East China Sea to a lesser extent due to competing claims with Japan.

CNOOC’s production in Bohai Bay, including the East China Sea, was 406,000 bbl/d in 2011.

An oil leak at the Penglai 19-3 field in Bohai Bay, China’s largest offshore crude oil field, forced a complete shut down by September 2011. Prior to shutdown, production rates at the field peaked at approximately 130,000 bbl/d. Conoco-Philips (a 49 percent stake holder) and CNOOC are waiting for approval from Beijing to restart the field.

Deep drilling

The quandary for China’s deepwater quest is both technological and lack of experience. To date, the country’s domestic offshore E&P has been in shallow waters, though China has partnerships with Western companies in deepwater E&P elsewhere.

To remedy this, China dreamt big and now that dream is coming to fruition. The country’s first deep-water drilling rig started operations last year.

“The sixth-generation semi submersible (CNOOC 891), owned by CNOOC began drilling in a sea area of 320 km southwest of Hong Kong at a depth of 1500 meters,” Xinhua reported in May.

With this, China became the first country to explore in deep SCS waters. Depths greater than 300 meters are internationally recognized as deep-water operations. The new drilling rig is called the Haiyang Shiyou 981 (HYSY 981).

HYSY 981’s platform is 114 meters long, 90 meters wide and 137.8 meters in height, weighing in at 31,000 tons, with a deck the size of a football field, according to Chinese media. The rig is capable of offshore operations at a maximum water depth of 3000 meters and a drilling depth of 12,000 meters. It took more than six years and nearly $1 billion to build.

Sounds impressive, however some experts think that China still has a long way to go. Christ Faulkner, CEO of Breitling Oil and Gas, told Energy Tribune that the knowledge CNOOC lacks they are purchasing.

He points to the Nexen deal as an example. On December 8, CNOOC disclosed that it received the Canadian government’s approval for its $15.1 billion take over of oil and gas producer Nexen, a Calgary based company. CNOOC expects the takeover to be finalized in the first quarter of this year.

Some however have a different take. Commenting on the Nexen deal, China Digital Times claimed in October that Nexen doesn’t possess the technical capabilities that CNOOC needs to operate in deep SCS waters.

“The Canadian firm is a newcomer to deepwater exploration and production,” they reported. “It does not own any drilling rigs and relies on outside contractors to perform most of the technical work involved in exploring and developing its acreage in the Gulf of Mexico — contractors that CNOOC could legally hire anytime it wants.”

As soon as HYSY 981 became operational, CNOOC Chairman Wang Yilin said, “Large deep water rigs are our mobile national territory and strategic weapon for promoting the development of the country’s offshore oil industry.” He added that its drilling would contribute to ensuring the country’s energy security and sovereign right over “territorial waters.”

While it remains uncertain whether or not Wang’s statements were cleared with Beijing, it nonetheless reflects China’s recent stance in the region.

For now HYSY 981 hasn’t moved into disputed SCS areas, but most experts think that it’s just a matter of time before they do.

“It’s clear that Beijing’s drive to develop advanced offshore drilling capability is now the cornerstone of its strategy to exploit the potential energy reserves beneath the SCS and help shield China from an attack on the Strait of Malacca which currently is the single waterway by which 90% of China’s oil imports flow through,” Faulkner said.

Two-thirds of China’s oil and natural gas reserves lie in deepwater beneath 300 meters, which has been the maximum depth of China’s expertise in the past, according to Faulkner. However he sees another achievement rivaling, even surpassing HYSY 981.

“I think a more significant aspect is the simultaneous launch of HYSY 201, which is China’s first deepwater pipe-laying ship which brings the missing mid-stream piece into place,” Faulkner said. “Combined, these two vessels represent a huge achievement and technological accomplishment.”

He added that HYSY 981 and 201 gives China a “drilling sword” by which they can swing in areas of the SCS that are in dispute.

“HYSY 981 is a weapon and China will use it to assist them in their energy quest. We will have to wait to see how long it takes Beijing to give the order to exploit energy further than 200-nautical miles from the Chinese coast,” Faulkner said.